With payday loans, poor get the loans, firms get the payday

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NATHAN HUNSINGER/DMN

In the past year, Yvonne Sands of Dallas has paid more than twice as much in fees as the $1,850 she borrowed in four payday loans. A separate loan had a 660 percent interest rate. 'I'm just trying to dig myself out of this hole I'm in,' she said.

On July 2, a 74-year-old Dallas widow named Yvonne Sands
received her monthly Social Security check of $1,360. Shortly after
7:30 a.m., she withdrew money from the bank and drove off to renew
four payday loans with annual percentage rates of about 250 percent
to more than 300 percent.

Sands can't afford to pay back the loans all at once, and they
come due every month. So each month, she takes out new loans to pay
for the old ones, shelling out nearly $400 in fees in the
process.

Over the last year, Sands has paid more than $4,200 in fees on
those four loans - far more than the $1,850 she received in
principal. And that's not counting fees on two other loans she paid
off earlier this year, one of which carried an annual rate of about
660 percent.

"I'm just trying to dig myself out of this hole I'm in," Sands
said.

For better or worse, millions of Americans like Sands borrow
billions of dollars a year from payday lenders. Catering to low-
and middle-income customers, payday lenders provide quick cash to
just about anyone with a checking account and a steady income.

Payday lenders say they're making risky unsecured loans to
willing customers scorned by other financial companies. Critics say
payday loans trap customers in a downward debt spiral, siphoning
off their income as they struggle to repay.

Payday lending has ballooned over the past decade, and Texas is
an industry mecca, with payday lenders in the state providing about
$3 billion in credit a year, according to industry estimates. Loan
stores are fixtures of street corners and shopping centers
throughout the Dallas-Fort Worth area.

Here's how they work: A customer goes to a payday lender wanting
a $350 loan, the average amount in Texas. The customer writes out a
check for $350 plus a lending fee, typically postdated to the next
payday. Fees typically range from $15 to $22 per $100 borrowed,
according to the Consumer Service Alliance of Texas, an industry
group.

The loan is typically due on the customer's next payday. If the
customer doesn't show up, the lender cashes the check.

Alternatively, Texas clients can pay the fee and take out a new
$350 loan to pay for the first - but that means paying another fee
when the second loan comes due. They can also pay the fee plus
whatever else they can afford, and refinance the balance.

In 2006, Congress passed a law capping interest rates on payday
loans to military personnel, and many states restrict them. In
Texas, the state constitution considers interest rates above 10
percent to be usurious except when specifically allowed by the
Legislature.

But under a legal loophole, payday lenders charge fees, not
interest. Regulation of payday loans is lax, critics say.

"There is an absolute complete lack of oversight of the payday
lending industry in the state of Texas," said state Sen. Wendy
Davis, a Tarrant County Democrat.

Bad credit, no problem

While Sands says she rues the day she walked into a payday loan
outlet, other customers say they appreciate payday loans for their
speed, convenience and accessibility. Low credit scores are
generally no obstacle.

Abel Martinez, 24, took out a $100 payday loan after his hours
were cut back at Walmart, where he loads trucks. He said he prefers
the loans to his credit card because he's afraid of overspending on
the card.

Shirley Proctor, 48, who cleans patients' hospital rooms, took
out a $600 payday loan in May after her car broke down. She aims to
pay the loan off "hopefully soon."

Jackie Williams, a medical records processor in her early 40s,
recently borrowed $400 to fix her car. "It has been helpful," she
said, adding that she expects to pay the loan back by Aug. 1.

All three recently paid loan fees at a southern Dallas branch of
Advance America Cash Advance Centers Inc., the nation's largest
payday lender.

The cheery storefront has clean white walls, spotless green
carpeting and ads for "Loans up to $1,000/Préstamos de hasta
$1,000" on its exterior glass. The company and the Consumer Service
Alliance of Texas recently invited a reporter and a photographer
for a visit.

Inside, posters on the walls advertise a range of financial
services, from debit cards to electronic money transfers to utility
payments. A store employee explains loan costs to customers.

Locations everywhere

The Consumer Service Alliance says its members have 2,400 stores
"in every legislative district in Texas." Nationally, there are
nearly 21,000 payday loan stores, according to David Burtzlaff, a
financial analyst at Stephens Inc. in Dallas.

That's about as many U.S. locations as McDonald's and Burger
King have combined.

North Texas is an industry epicenter, home to small-dollar
corporate giants such as Fort Worth-based Cash America
International Inc. and Irving-based Ace Cash Express. The Cash
Store belongs to Irving-based Cottonwood Financial.

Since 2005, payday lenders in Texas have not been considered
lenders at all, but rather "credit service organizations."

Legally speaking, they charge a fee for connecting borrowers
with third-party lenders such as DSI Lending Resources Inc. and NCP
Finance LP.

Business in the payday lending industry has been mixed recently.
Mass joblessness has hurt income levels and loan demand.

Payday loan stores supplied $30.3 billion in credit to consumers
last year, generating about $4.8 billion in sales revenue,
Burtzlaff estimated. That was down from an estimated $35 billion in
2008, with revenue of $5.5 billion.

The industry provided an additional $8.2 billion in loans
through the Internet last year, up from $7.1 billion in 2008, he
said.

The industry depends on extremely high annual percentage rates
to turn a profit because a lot of loans are never paid back,
Burtzlaff said.

While borrowers typically provide lenders with postdated checks,
some customers close their accounts or lose their jobs or have
insufficient funds to cover the checks.

A payday lending store brings in $15.92 per $100 loan, Burtzlaff
estimated. After lending losses, operating expenses and other
costs, a profit of $2.19 is left. Consumer Service Alliance says
the number for its members is even lower.

Lifesaver or anchor?

Do payday loans help people?

A big problem for many people is what to do when unexpected
costs arise. Some people dip into savings, tap credit cards or ask
relatives for money.

Those who lack such alternatives often face a menu of overdraft
fees, late fees or cutoffs of utility service - or making a trip to
the local pawn shop.

Under certain circumstances, taking out a payday loan can be
cheaper than other immediately available alternatives, advocates
say.

"The industry exists because we offer our customers a product
that is more desirable than the alternatives," said Rob Norcross, a
spokesman for the Consumer Service Alliance.

A 2007 study by the Federal Reserve Bank of New York examined
the aftermath of payday lending bans in Georgia and North Carolina.
The study found that households in those states bounced more
checks, complained more to the Federal Trade Commission about
lenders and debt collectors and filed for Chapter 7 bankruptcy
protection at a higher rate than households in states with payday
lending.

By contrast, other studies have found that using payday loans
makes it more likely that borrowers will file for bankruptcy, close
a bank account, delay medical care or become delinquent on a credit
card.

Brian Melzer, a finance professor at Northwestern University,
found in his own study that the more people had access to payday
loans, the more they had trouble paying basic costs.

"I find no evidence that payday loans alleviate hardship,"
Melzer said in his study. "On the contrary, I find that loan access
leads to increased incidence of difficulty paying mortgage, rent
and utilities bills; moving out of one's home due to financial
troubles; and delaying needed medical care, dental care and
prescription drug purchases."

Moreover, some borrowers take months to pay back their loans,
paying high fees over and over. Based on data collected by
regulators in Florida and Oklahoma, between a quarter and a third
of payday borrowers use 12 loans or more in a year, Melzer
said.

"It's a product that is very, very difficult to repay," said Don
Baylor, senior policy analyst at the Center for Public Policy
Priorities in Austin. "It ends up becoming a much larger and larger
burden on a household over time."

Not paying leads to an encounter with the debt collector.

When 55-year-old schoolteacher Cindy Hash was unable to pay back
a $1,500 loan from Ace Cash Express on time, the company called her
Grand Prairie charter school and left messages for the principal,
she said. The company also made repeated calls to Hash that she
described as threatening.

"I wanted to pay them back," she said. "I just couldn't do it at
that time."

She sued Ace last year, alleging the company violated consumer
protection law in attempting to collect the debt. She reached a
confidential settlement.

"I just want to make sure to warn people," she said. "You just
don't think in the United States people would be allowed to do
that."

Ace denied the allegations in a court filing. A company
spokesman did not return calls seeking additional comment.

Hash said she intends to pay back another payday loan she took
out to help repay Ace, although she hasn't been servicing it in
recent months.

'I had no choice'

After Yvonne Sands withdrew money from her bank account July 2,
her first stop was Speedy Cash on East Kiest Boulevard and South
Lancaster Road. It was early morning, but seven customers were
already in line ahead of her. Renewing a $580 loan cost Sands $119,
and she paid down an extra $10 of the balance.

Next came Ace Cash Express on Camp Wisdom Road, where she paid
about $98 to renew a $470 loan. At a PLS Loan Store on Buckner
Boulevard, she rolled over a $300 loan for $77. The fee to renew a
$500 loan at a nearby Advance America was $104.

"These loans, they didn't make me do them, but I had no choice,"
said Sands, who worked for Texas Instruments 33 years on the
assembly line and in quality control. "This is the only means I've
had to try to be independent."

Sands has a bank account but said she doesn't have good credit.
Her husband, who died in 2005, piled up credit card debt and failed
to pay back some loans. Her name appears on two civil suits from
the 1970s involving unpaid debts, including one case with her
husband. Both suits were eventually dismissed; Sands said she
didn't recall them.

Money is tight these days, especially because of rising medical
costs, and she has particular trouble meeting unexpected expenses.
She walked away from an earlier payday loan last year.

She has seven kids, but they have financial challenges of their
own, such as health problems, family costs and a possible
foreclosure, she said.

Arthritis sometimes makes it hard for her to walk, and she's
thought of moving to a nursing home. But she wants to stay in her
house to provide shelter for her 48-year-old son, an emaciated man
who suffers from severe respiratory problems, and her 23-year-old
grandson.

She said she would continue paying nearly $400 a month to renew
her payday loans until she finds a way to pay them off.

"I just do the best I can with these loans, and I want to get
rid of them," she said. "I don't recommend them for anybody. But
when you get in a position like I am in, you have no choice. You
just have to go until you can pay them off.

"If I can just get those paid ... I say, 'I make this promise,
Lord: I will not make another loan.' " QUICK-CASH OPTIONS

Payday lenders are not the only option for consumers needing
quick cash. Here are a few others:

Advances from employers: Some employers grant paycheck advances.
Because this is a true advance rather than a loan, there is no
interest and the advance is therefore cheaper than a payday
loan.

Emergency assistance programs: Many faith-based groups and
community organizations provide emergency assistance, either
directly or through social services programs.

Credit union loans: Many credit unions offer small short-term
loans to their members. Many also offer low annual percentage rate
loans (prime to 18 percent) with quick approval on an emergency
basis. Unlike payday loans, these give borrowers a real chance to
repay, with longer payback periods and installment payments.

Cash advances on credit cards: A $300 cash advance on the
average credit card, repaid in one month, would cost a $13.99
finance charge and have an annual interest rate of almost 57
percent. By comparison, a payday loan costing $17.50 per $100 for
the same $300 would cost $105 if renewed one time, or an annual
interest rate of 426 percent.

Military loans: Several companies offer loans of $500 to $10,000
to active-duty and retired military personnel. These loans cost far
less than payday loans because they have a much lower APR, 33
percent to 34.99 percent.

Small consumer loans: Small consumer-finance companies offer
small short-term loans that cost up to 60 percent APR but usually
are in the range of 25 percent to 36 percent APR. If you borrowed
$500 at 36 percent APR and repaid in monthly installments over four
months, you would have paid $38.04 in interest. If you renewed a
$500 payday loan every two weeks for the same four months, you
would have paid $700 in fees if the fee was $17.50 per $100.

SOURCE: The Center for Responsible Lending SERIES CALENDAR

An in-depth examination of the effects of debt at home and in
business, the country and the global economy.

June 13: North Texans have too much debt, but so do the rest of
the country and the world.

June 20: Americans love their tax breaks. But can the country
afford them?

July 18: How consumers got so deep in debt.

Today: Texas is a hotbed for the payday loan industry.

In coming weeks:

•Big companies find innovative ways to manage debt.

•Creditors like China have strong views about U.S. debt,
while debtors such as Greece, Ireland, Iceland and Spain are in
worse shape.

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